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If You Are A US Investor Who Is Bullish Japan, Look Away
Day after day, well-dressed talking heads are paraded on business media and proclaim how cheap Japan is, how Abenomics will work (he promise... if it doesn't we'll have to question everything we believe in), how GDP is backward-looking (so ignore it... and every other economic indicator), and how being long Japanese stocks (of course, hedged back to dollars because you don't want to take the currency risk that Abe is creating) is a "no brainer." The problem with that strategy is... in 2014, the JPY-hedged Japanese stock market investor in the US has not had a daily close in the green year-to-date and is down over 5% for the year... but it gets worse.
Here is CNBC just this morning proclaiming why being long Japanese stocks is the best trade... Fund Managers are the most bullish Japan in nine years...
However...
Since 12/30/2013, the USD investor who is long the Nikkei 225 hedged back to USDs has yet to see a green close and has seen a total return notably worse than even the worst performing US index - small cap stocks...
The problem is growing... Since the BoJ's big QQE triple-down plan, the USD-based investor in Japanese stocks is back to breakeven...
And since the GDP print, the USD-based investor in Japanese stocks is down hard...
Of course, this is all pointless facts as the meme is that Japanese stocks are the no-brainer trade thanks to Abenomics.. besides Japanese Chief Cabinet Secretary Yoshihide Suga explained last night:
- SUGA: STOCK PRICES DOUBLING SHOW POLICIES PERMEATING THROUGH
Which must mean Venezuela's policies are proving massively supportive for their ecoonomy?
Simply put - the nominal value of all these indices may be rising but the currency is devaluing at a more rapid pace. As Kyle Bass previously warned, beware the 'nominal' stock market cheerleaders...
Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC's Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected). However, he caveats that nominally bullish statement with a critical point, "Zimbabwe's stock market was the best performer this decade - but your entire portfolio now buys you 3 eggs" as purchasing power is crushed. Investors, he says, are "too focused on nominal prices" as the rate of growth of the monetary base is destroying true wealth.
* * *
So apart from the fact that Japanese stocks for a US investor have been a terrible investment this year even with all the efforts of the BoJ and Abe... fund managers are exuberantly bullish still...?
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"Never let facts get in the way of a good sales story or a working Ponzi." - Goldman
The sheep must be herded constantly, otherwise they tend to wander off....
We CNBC'ed some folks
3 egg omelet for your last meal.
"So apart from the fact that Japanese stocks for a US investor have been a terrible investment this year even with all the efforts of the BoJ and Abe... fund managers are exuberantly bullish still..."
i wonder what these fund managers predict yen to be at end of 2015 ... or, worse "huh?"
Trick as every money manager knows is to get out with the gain before the muppets figure out your gone.
Already posted this a few days ago, but thought I would put it up again.
Here's how I see it going down:
Yen 125 Edge of normalcy. Japanese corporations become concerned. Some CFOs begin preferring hard currencies to Yen when they have the option.
Yen 140 BoJ intervenes buying Yen on open market.
Yen 150 Hot topic of public debate. Corporations moving more quickly to raise hard currency. Gold prices firm and begin to rise over stability concerns.
Yen 175 BoJ intervening regularly. Public debate heats up in Japan. World financial community concerned. Companies selling Japanese assets to raise hard currencies and holding currencies in over seas subsidiaries. Confidence in Abe gov't waning.
Yen 190 BoJ intervening heavily. Public widely concerned, Japanese equities now moving in line with currency, 10% off of peak, as BoJ hints at interest rate hikes to defend. FinMin blames US Fed for hiking US rates and publicly states Fed should refrain from further increases.
Yen 220 PM loses no confidence vote, opposition discusses austerity measures, inflationary recession begins, BoJ publicly jawbones hiking rates to defend. BoJ opens massive swap lines with Fed, ECB and BoC to handle currency flight. Gold rises sharply. Number of cars on road visibly reduced due to skyrocketing price of imported gasoline.
Yen 260 takes out all time low. Confidence in Yen as currency failing. Amid deepening concern over stability of banks and insurance cos, BoJ hikes rates over 5% to defend to Yen. JGBs begin trading at sharp discount. IMF discussing intervention.
Yen 295 New all time low. Equities down sharply 25% off highs. Recession deepens rapidly, gov't implements emergency measures to care for pensioners on fixed incomes, BoJ hikes rates to 10% to defend, Gov't bond auctions fail daily for a week. JGB's pricing in 15% implied haircut. IMF begins coordinating massive intervention in currency markets by CBs around the world.
Yen 240 Sanity takes hold in bond markets as BoJ hikes rates for third time to 14%. Japan into full blown depression as imported fuel runs into prices throughout the economy. Equities plunge now off 55% from highs. Corporations agree to continue to employ millions they would otherwise layoff due to slack demand. IMF coordinates combined CB efforts to stabilize Japanese banking and insurance companies to stem global contagion. US and ECB announce plans to backstop US and EZ insurance cos and banks holding large amounts of JGB's. US and EZ cut rates sharply to ward off recessionary pressures to no avail as world is plunged into deep recession.
"Yen 175 BoJ intervening regularly. Public debate heats up in Japan. World financial community concerned. Companies selling Japanese assets to raise hard currencies and holding currencies in over seas subsidiaries. Confidence in Abe gov't waning."
That ship has sailed at the current Yen. And too, the Yen is already a hot topic of public debate.
The Yen was at 300 as late as 1976.
You are a little thin on the facts that form the basis of your timeline.
I stand corrected. Hadn't done enough research. After WWII, the USD/Yen exchange rate was fixed at 360. This rate persisted until 1968 when the U.S. abandoned the godl standard. By the early 1970's the mis-valuation of the Yen was a key concern that led to moving away from Bretton Woods.
I think the Yen is a hot topic of debate among people who pay attention to such things. When it deteriorates further it will become a widespread topic of discussion, even outside of Japan.
There aren't really any facts to form the basis of this timeline. I just outlined one possible scenario. I'm happy to entertain any and all criticisms or alternative scenarios/thoughts.
Thanks for the reply. The average person understands the effect of the Yen movement every time they go to the food shop. When the Yen was 75, they could purchase a lot more things. Now, they have less in their baskets. They understand and talk about it.
Today (JST), Abe is dissolving the Diet and scheduling a snap election in a couple of weeks. If that does not show that his government has already lost the confidence of the people (see previous comment about the public debate over the Yen), I don't know what does.
I would not suggest that your timeline is completely off, however, if you are not able to understand the current situation how can your projections be considered credible. That said, the Yen at 175 would be a lot more disruptive, at least for the Japanese, than you suggest. Abe would be long gone before then (he may not survive the snap election).
I think I have a decent grasp of the current situation. I believe Abe called the election to gain political advantage. He wants to avoid an election a few months from now if things are worse, and he gets a "mandate" to continue his economic policies. I can't imagine a more pure play public referendum on QE (or any other economic policy). It's going to be interesting to watch. I don't follow Japanese politics that closely, but I bet it would be fun to watch the public discourse, as well, leading up to the election.
As interesting were Karuda's comments distancing himself from the government's economic policies. The BoJ has monetized all of the government's debt to date because, I presume he felt, he had no other choice. Now, to see cracks publicly appearing between the BoJ and the government is disconcerting to say the least. Japan is truly "all in" on this policy. I just hope, for all of our sake, that Japan wins this hand. That's where the poker analogy ends, because if Japan loses this hand and has to walk away from the table, all of the other "players" are going to be worse off, not better. If Abe loses the election, the lack of clarity on Japan's economic direction will cause immediate turmoil in the world markets and could accelerate Japan's downward spiral, not slow it.
At some point, JGB's are going to start adding on premium for the likelihood of inflation. At that point, if inflation has not moved through their system and into wages, IMHO they are likely to begin a descent that could become disorderly. I think a harbinger of that realization in the markets will be revealed by the Nikkei and the Yen moving in tandem.
Just my random thoughts.
Abe called the election to try to save his ass. His Finance Minister, Aso, has also distanced himself from Abe on the delay of the consumption tax hike (another signal that Abe is more fearful of the voters who do not want the increase than the elite (and the US, IMF, BIS, etc.) who advocate for it).
As for inflation, it has already hit main street, primarily in food and energy owing to the weak Yen and the fact that Japan imports almost all energy and 60+% of food. The government is under-reporting it because it is the excuse they use for QE and low interest rates. With official inflation, the government would have to deal with increased interest on their debt, higher benefit tied to COLA, and declining consumption (assuming that wages will never increase to keep up with inflation). With official inflation the whole thing collapses.
As for Japan "winning," what would they win? For the majority of Japanese, the short term pain of a collapse would be a long term win for them. It should have happened 25 years ago.
Great comments suteibu. Do you think deferring the tax increase make Abe more popular (and likely to survive the upcoming vote) or less?
From what you said, it sounds like people on fixed income pensions are probably getting the worst of it.
If the Yen truly falls off a cliff and the BoJ ultimately has to hike rates to defend a complete collapse of the Yen, JGB's will be crushed. That could take down the Japanese banking system and many insurance companies. From the Fed's point of view (and the rest of the world), I suspect that's the transmission mechanism they worry about the most. Thoughts?
I don't think the delay really helps that much. Everyone knows it's coming so most realize it as a political ploy. As for higher interest rates, it scares the government more than anything China is likely to do in your wildest imagination.
Like in the US, the low interest rates and the weak Yen are hurting savers and retirees who live off government benefits.
Look, the Japanese are incredibly intelligent people despite the way many Americans portray them. They don't like the government any more than most Americans but they understand (like Americans) there is little they can do about it. They probably prepare themselves for what the government does better then Americans, however.
Great stuff Suteibu. (And for what it's worth, I suspect most educated Americans think that the *average* Japanese person is probably better educated and therefor more intelligent than the *average* American.)
I actually think there's an important messag buried in that idea: if Japanese economists and (most) government officials are intelligent and understand the way the world works, and yet Japan is in the present predicament it is in, what's to say the U.S. won't end up there? Lord knows, we're piling on the debt ourselves and our Fed sure loves its Keynsian policies. We should be humble enough to learn from Japan's history and avoid it ourselves. Will we? That chapter of the story remains to be written and might turn in part on how the next chapter or two gets written in Japan's history books....
You should know that the US has been influencing Japan's economy since 1853. Nothing happens in Japan affecting American interests that are not discussed and agreed upon. When Japan does something and you ask cui bono, look first to what's in it for America.
"Winning" at this point, would probably be anything that avoids (i) a collapse of the Yen, (ii) a collapse of the Japanese banking system, and (iii) a depression with widespread unemployment. If the government and BoJ can find a way to restructure Japan's debt without triggering up any of those things, I'd call it a win.
The Yen is collapsing. Japans banks have been insolvent since the early 90s. Japan has been in a recession for 25 years. Treading water for more than a generation does not seem like a win.
Japan rebuilt its economy after much worse than this episode, they can do it again.
Suteibu, since you seem to be on the ground in Japan (I'm in the US), what are the most obvious impacts of the Yen movements on everyday life? Is it the cost of food? gasoline? Where are people feeling things?
Well, when you consider that the Yen has weakened by 56% since last year while wages have remained stagnant and that almost all energy and 60% of the food is imported, the effect seems fairly obvious, especially with the lower middle class and below. And, transportation costs and consumer goods dependent on imported raw materials are up driving up costs everywhere or, where corporations are maintaining price levels, driving down margins.
About 40% of the employed population is working temp or contracts, so both the low incomes and the fear of job loss impacts consumption.
The one bright spot is tourism, mostly from China (ironically).
One more question for you if you have time. Since, as you pointed out, Japan imports the vast majority of its energy, do you think people are willing to let nuclear generation get fired back up again or will the fear of another Fukushima preclude that?
Well, it's been 3 1/2 years since Fukushima and they have only authorized a couple to restart. This delay certainly has not been because the nuclear industry or the government has been hesitant about it.
Japan has been bitten by nuclear energy 3 times in last than 70 years (including the Daigo Fukury? Maru - ironically translated as S.S. Lucky Dragon 5) so there is no one alive today who has not had a lifetime experience with its negative effects.
Nice scenario. I'd like to write an article on my Google+ account based on that assumptions. May I ?
You may. If you would reference this post, that would be great. Also, tweeps can follow at @ml8_ml8. As of right now, I think I have 2 followers.
on other news, since the treasury bond yield flash crash (prices surged, dealers and NY FED couldn't handle it) and the end of QE, there are 3 levels of yields the NY FED will not accept that we break below - despite yields declining around the world:
5yr note: NY FED and partners do not accept yields below 1.6%
10yr note: NY FED and partners do not accept yields below 2.3%
30yr bond: NY FED and partners do not accept yields below 3.02%
Whenever we reached those levels (6 times in the last 30 days), a mythical creature comes in and immediately reverses the obvious trend.
It is in vain.
TYLER, juhuu, request: can you make your site https please? ask eff, its not that difficult.
thanks.
"in 2014, the JPY-hedged Japanese stock market investor in the US has not had a daily close in the green year-to-date and is down over 5% for the year... "
what? what the hell? the Nikkei is up considerably for the year, and the dollar is up huge against the yen.
you don't know what the fuck you are talking about.
have you started talking to car people?
You just confirmed the point of the article. The dollar being up huge against the yen means that when you sell the stock for yen and then convert to USD you lose your ass. The yen has lost around 10% against the USD just in the last month. What is so hard to understand?
No expert here, but what if, on Jan 1 2013, I bought the nikkei, and then bought equivalent USD/JPY contract. (=Short JPY)
The Nikkei would be up, and the loss in the local currency would be offset by the gain in the USD/JPY contract.
That is how I might have hedged a potentially weak JPY.
Tools hed,
if you hedge the position, you are fucking short the yen.
But since this two-legged trade is too fucking complicated for you, maybe you should try an ETF. The Wisdomtree Japan Hedged Equity ETF (DXJ) is +7.4% ytd. That is a lot different than down 5%.
*POP*
That is the sound of your head getting removed from your ass.
Cesium crackers anyone.
someone sold 22,000 EWJ puts this morning ... im guessing kuroda is coming out with another blast of QE between overnight & monday morning - then we'll see that unwound by tuesday
You are about 3 times richer than you think .
See
https://www.academia.edu/9405720/The_Economics_of_Disrespect_Update_I
or
http://andreswhy.blogspot.com/2014/11/the-economics-of-disrespect-update...
Also http://andreswhy.blogspot.com/2014/11/laundry-economics.htmlDid she smoke PCP before that interview? She thinks Abe will GAIN seats in the election? He'll be lucky if he isn't kicked out.
Weird. A lot of people use ETFs like DXJ for this and they're up nicely for now.
It's easy to bash on Japan. But the fact is up or down is good. Once you understand shorts and longs direction is irrelevant. The trend is golden. Volatility is king. And from that standpoint Japan rocks. If you understand the rules and play it right you can make a boatload off JPY right now. I am talking forex here. I don't mess with anything else. If the whiners put all that effort into working the right game they'd realize that Japan is a friggin' goldmine. Time to check the robot. ~ Bill